Look to nearly any personal finance blog or advice column and you’re likely to hear similar advice regarding investments.  It generally goes something like this: “Very few investors (and probably zero novices) can successfully time the market to get better returns.”  I myself have made the statement many times.  The concluding advice is to invest passively in low cost index funds and be satisfied to match the market, since the probable alternative of active investing is to under-perform the market.

Though I genuinely believe this prevailing wisdom, I wanted to ensure that it’s the case not for the average investor, but for me as an investor.  I’m not suggesting that I’m better or worse than average, but my performance is really the only one that matters to me and yours should be the only one that matters to you.

Setting Up The Experiment

I created and funded a new brokerage account for the sole purpose of comparing the two investment methods.  I intended to use half of my money passively and the other half actively.

Background Info

My passive investment would be a diversified ETF that produces a monthly dividend that will be automatically reinvested.  The active investments would be trades that I intended to generally hold for hours or days, or longer if so inclined.  I’m intentionally not discussing the dollar amounts and actual investments because I’m more interested in conveying my process rather than my specific transactions.  I will say that my investments are sufficiently large that commissions are largely negligible, representing less than one-quarter of a percent of the transactions.  I could have run the experiment without risking actual money, but I don’t want my results to be biased.  By putting actual money at risk, I’m more inclined to find as profitable investments as possible for each method.  Without risking money, I might make better or worse active investments, hoping to prove that one method is better.  Instead, I’m trying to have highly profitable passive and active investments whose results will speak for themselves.

Monthly Results

It is my intent to publish the gains and losses of my two methods on a monthly basis, for as long as I continue the experiment. Since I began in mid-April, my first month’s results are in and reported below.  My second month is also nearly complete.  Those results will be published in the next week or two.

Month 1 Results

Passive: I had two transactions this month; 1 purchase and 1 dividend reinvestment.  My passive portfolio increased by a total of 10.19%.  This gain includes commissions, including the one that would have been charged had I liquidated my position at the end of the month.

Active: I had ten transactions this month; 5 purchases and 5 sales.  My active portfolio increased by a total of 11.85%.  This gain includes commissions.

Benchmark: During the same time period, the S&P 500 increased by 8.54%.

Overall Results to Date

After one month, my active invesments have proven to be more profitable, though my passive investments also beat the benchmark return of the S&P500.